Historic Ratios – Which Direction Will Asset Prices Move in 2020?

Peter Hemple makes some early predictions for asset prices like property, gold and oil

Yet again our annual analysis of the historic ratios of the five major asset prices (FTSE 100, gold, Brent crude oil, UK property and London property) have proved to be a very reliable indicator of which direction each of them will move in the coming year.

If you have not read any of the annual articles on historic ratios before, the formula is relatively simple. We take the price of each asset at the end of every year for the previous 20-year period. This gives an average price over the past two decades, which allows us to calculate the average ratio between two assets, like gold compared to oil, or UK property compared to the FTSE 100 etc.

Once all of the ratios have been calculated we then take the most recent end of year price to give a solid indicator of what each asset price should be. This allows us to make an estimate for the coming year, with regards to which asset prices should rise and which should fall.

So how did the estimates a year ago pan-out in 2019? The FTSE 100 closed 2018 at 6730 and we estimated that it should rise to 7777. It actually increased to 7560 (up 12.3%) so that was very accurate and it also peaked at 7731 in July 2019.

We also said that the oil price (Brent crude) was far too low and that it should increase from $54.2 to $82.7, which would have represented a huge rise of more than 50%. While the price of oil did not rise that much, it did increase by 21.8% to $65.98, after surging by more than 38% to $74.87 in April 2019.

Our only other correct prediction was for London property prices to continue falling in 2019 (Nationwide price data) and while they did not fall by the 22% as predicted, they did fall slightly but only by 1.8%. The historic ratios also indicated that UK property was overvalued a year ago and that prices nationally should fall by 6-7%. However, they actually edged up slightly by 0.8% in 2019 and using the latest ratios, UK property now looks undervalued (more on that later).

This leaves us with our only big mistake in 2019, which was for the gold price (per ounce) to fall by 14% from $1,283 to $1,102. However, gold had a great year and did not fall below $1,200, instead rising by 18.2% to $1,517/oz. However, overall there were more correct calls than incorrect calls and a year ago we did emphasise that the two main trades to make were ‘long oil’ and a short on London property. Had an investor decided to do that, they would have made an return of 23.6% last year. Not too shabby an outcome, most readers might agree.